MBA Reduces Origination Outlook Again. Offers Variety of Expectations

By: • Mon, Jun 22 2009, 4:13 PM

In its monthly mortgage finance forecast, the Mortgage Bankers Association (MBA) lowered its forecast for mortgage originations in 2009 to $2.03 trillion today. This is the fourth consecutive month the MBA has reduced its outlook for total mortgage originations. In March, the MBA forecast a total of $2.278 trillion originations, which was revised lower in April, May, and now June. The most current outlook anticipates a total of $2.034 mortgage originations in 2009, a reduction of $746 billion from the March estimate.

Purchase origination expectations, previously forecast to total $821 billion in 2009 (based on March release), were trimmed $84 billion to $737 billion while refinances, estimated to total $1.959 trillion in March, were reduced by $662 billion to $1.297 trillion.

In regards to the decline in expected purchase originations, the MBA's Chief Economist Jay Brinkmann had this to say:

"First, while home sales have been higher than expected, home prices have fallen more than expected leading to smaller loans. Second, the large share of distressed sales or homes purchased by investors has resulted in the share of all cash home purchases being higher than normal. Therefore, even with higher projected home sales for all of 2009, the projected lower average home price and higher cash share have combined to lower projected volume of purchase originations."

When discussing the reduced expectations for total refinance loan volume, Brinkmann noted that although the Federal Reserve has successfully supported mortgage rates by purchasing almost 85% of new GSE MBS issuances (Fannie Mae, Freddie Mac, Ginnie Mae Mortgage-backed securities), the Fed's failure to moderate long-term Treasury rates has lead to an increase in primary mortgage rates. When explaining the MBA's adjusted outlook for interest rates, Brinkmann said:

"Given the high issuance volume of Treasuries in June, the Fed is likely approaching its self-imposed ceiling of $300 billion and may be reluctant to increase its current commitment to purchase long-term Treasuries for two reasons. First, Fed officials have made public statements about their outlook for an improving economy. Second, the Fed may have decided that its purchases may not be efficacious in maintaining lower long-term Treasury rates and may not be worth the risks entailed in building up a large Fed balance sheet that will need to be reduced at some future point"

Looking further down the road, the MBA believes that high unemployment rates and "anemic" growth rates will help moderate inflation and demand for debt issuances. The MBA expects that mortgage rates will steadily rise from 5.10% in Q2 2009 to 6.10% by Q2 2010 before stabilizing near 6.30% by Q4 2010. However the MBA did offer up a warning on inflation:

"Another school of thought holds that the large increases in federal debt will put tremendous pressure on domestic and international investors to absorb this debt, and that the large increases in the money supply and declines in the dollar could trigger inflation, all leading to higher rates."

Furthermore, due to the high degree of economic and financial uncertainties, the MBA outlined another possible outcome:

That said, from Mortgage News Daily's perspective, we are expecting further revisions to origination and interest rate outlooks as new data comes to light. The behavior of financial market participant's is currently playing a large role in Fed policy and thus, future economic outcomes. The economic future of the United States, therefore, remains quite fragile and vulernable to a shift in financial market sentiment. Our bias remains that economic weakness will persist until housing shows consistent signs of stabilization.

Plain and Simple: Without mortgage rates in the low 5's/high 4's, a housing recovery will be muted, the labor market and household wealth will stagnate, and the US economy with undergo a longer than expected period of "anemic" economic growth.